Official Blog of the Institute of Local Government Studies, University of Birmingham

You say ringfencing, I say earmarking: those billions of local authority ‘hoarded’ reserves

A welcome feature of Communities and Local Government Secretary Greg Clark’s early months in office were his obvious efforts to be less interventionist and provocatively critical of local government than his predecessor, Eric Pickles. It’s not taken long, though, for it to become clear that he’s not that cuddly, and that the ghost of Pickles Past still haunts the DCLG’s Marsham Street corridors.

So, come November’s Spending Review, it was more disappointing than surprising to hear the Communities Secretary not so much echo as anticipate George Osborne’s injunctions to local authorities to make good their grant losses by drawing on the billions of revenue reserves they’d built up – precisely as Eric Pickles was wont to do each budget-making season.

The BBC was a touch more restrained, but statistically, at least in the East of England, about as useful as a punctured condom. “Councils across the East of England are sitting on reserves of £470m, a BBC East investigation has found”. Which might have been fleetingly interesting, had the ‘councils’ not comprised an apparently arbitrary selection of “all unitary, county and district authorities” from the East of England region and beyond, and had the figures borne any close correspondence to those just released by the DCLG, on which the ‘investigation’ claimed to be based.

Normally, none of this slapdashery would matter much, apart from irritating any viewers who resent being manipulated into being outraged at some scary big numbers and alleged mismanagement that they have no means of judging for themselves. In this case, though, it came to the attention of Councillor David Finch, Conservative Leader of Essex County Council, who understandably took the whole thing quite personally and proceeded ‘do a Hudspeth’.

INLOGOV blog readers may recall my recent account of the revealing correspondence between David Cameron and Ian Hudspeth, Conservative Leader of the PM’s own Oxfordshire County Council, in which the latter patiently and at length put the PM right on a number of misunderstandings he’d revealed about the county’s financial management and indeed about the impact of his own government’s policies. I sub-titled the exchange ‘the gift that keeps on giving’ and, although this wasn’t the form I anticipated a further instalment taking, it certainly fits the bill.

C’llr Finch had been one of numerous council leaders, in addition to the Local Government Association (LGA) itself, who protested back in November that:

“Whitehall should not be dictating how we should be managing our finances and reserves. Holding reserves is simply prudent and effective financial management and is done to ensure that in the event of an emergency or a major incident we can react without impacting other services.”

Politically if not personally, the Essex leader must have had a trying Christmas, not least through local MPs and their constituents having gained the impression that swilling around County Hall was not floodwater, as elsewhere in the country, but oodles of revenue reserves. He therefore wrote Cameron a three-page letter – described on his blog as ‘polite’ and by others as ‘hard-hitting’ and ‘scathing’ – setting out for the PM a few home truths. There were details of the council’s past savings, future enforced cuts, and ongoing budget pressures, but you sensed that, even more than these specifics, what really irked C’llr Finch was the flak he’d had to take about the council’s alleged reserves:

“I continue to be alarmed at central government misunderstanding, or even ignorance, about council reserves. Essex MPs have been told by the DCLG that the council is sitting on £300million of unringfenced reserves. We actually only have about £60million. The reality is we have just 23 days of available funding in our general reserve.” (my emphasis)

Like Hudspeth in Oxfordshire, the Essex leader is concerned more broadly about what he terms the “giant disconnect emerging between central government and local government” concerning local financial management (my emphasis). But the reserves issue has specific figures attached – a £240 million gap is a big misunderstanding by any standards – which means that the Essex section of the relevant DCLG table enables us to work out what’s probably been going on.

It would seem that the DCLG failed properly to explain, or the MPs failed to grasp, that, near-synonymous though the terms ‘ringfenced’ and ‘earmarked’ may be in any everyday conversation in which they may happen to appear, in local finance lingo they are fundamentally different. The DCLG distinguishes between local authorities’ ringfenced reserves, allocated specifically to schools or public health (though not housing, which is completely separate), and non-ringfenced, which are the rest.

Large local authorities especially, however, earmark often a large proportion of their non-ringfenced (sometimes labelled ‘usable’) reserves for a range of different but particular purposes. Like any prudent budgeter, they set money aside for future spending, rather than having to find it all when it suddenly becomes due by the end of the month. Common earmarked reserves are for financing future capital investment and major repairs, for PFI (Private Finance Initiative) payments on long-term projects, to cover claims made under a council’s self-insurance arrangements, to enable future savings targets to be delivered, and, not least in recent years, to safeguard against future years’ grant funding reductions.

The non-earmarked remainder – under one-fifth in Essex CC’s case – goes into the council’s General Fund, or C’llr Finch’s ‘general reserve’, which will be used to balance the budget if it’s overspent at the end of the year, but, in the meantime and more topically, will be used to pay for sudden and large cost pressures – like damage caused by exceptionally severe weather conditions.

David Cameron, who either doesn’t understand or doesn’t care about these not terribly subtle ringfencing and earmarking distinctions, seems happy to fire off petulant and factually inaccurate letters to his County Council leader, and to have his MPs similarly badger their own councils.

Clark’s case, though, is different. He certainly does understand, not least because a CIPFA survey of local authority reserves only last summer spelt out the message in detailed clarity. The numerous “recent changes in local authority funding have significantly increased the level of risk being managed by local authorities” (p.2). The radical transformations in service provision on which ministers are so keen have major one-off costs, including redundancy costs, that have to be budgeted for (p.3). “Using reserves purely to support ongoing expenditure merely postpones the need for cuts and makes those cuts more difficult to deliver when needed …” (p.4).

Above all, there were the statistical findings of the CIPFA survey – that, almost precisely reflecting the situation in Essex, nearly four-fifths of councils’ reserves were not being either mindlessly or politically ‘hoarded’, but were already earmarked for specific, and often Government-created, purposes. To accuse ministers of ‘going native’ is almost a ‘Yes, Minister’ cliché and in Clark’s case probably unfair, but he certainly doesn’t seem as cuddly today as he did six months ago.

Chris Game is a Visiting Lecturer at INLOGOV interested in the politics of local government; local elections, electoral reform and other electoral behaviour; party politics; political leadership and management; member-officer relations; central-local relations; use of consumer and opinion research in local government; the modernisation agenda and the implementation of executive local government.